Quote:
Originally Posted by bunt_q
Something I feel I should add, because it seems like common knowledge to me, but maybe it's not:
Nobody is building $300 million speculative projects these days. They are simply impossible to finance (except for maybe in the absolute largest markets - NYC). Upfront equity requirements are higher, pre-leasing requirements are higher, credit is tighter in general, and probably will remain so for the foreseeable future.
Add to that - the bigger the building, the more expensive it is on square foot basis, and the longer it takes to permit, build, and bring online.
So not only do you need ever-more and earlier commitments for bigger projects, somebody willing to commit to lots of space all at once, they also have to be willing to make that commitment 2-3 years before that space is actually available. So you need a company that knows with certainty they will need a ton of space, but can wait a few years to get it. Also rare.
Basically, everything about market fundamentals is pushing us toward more modest buildings that require less $ up front, and can be built quickly. Uncertainly, modest growth, and tight money trump ego in 99% of developments.
The odds are very much stacked against any moderate sized city getting large towers unless there are no other alternatives. And out west, we have alternatives. I suppose you could, as a region, zone out office building anywhere but your downtown. But as long as a 200,000 sf building can be tossed up, that'll act as a release valve that prevents enough demand pressure from building to get you a big building, except in the rarest of circumstances.
EDIT: Incidentally, we see the same thing in other types of development as well. You can't get a bank or bond buyer to finance infrastructure/residential/retail development without guaranteed revenue streams to back it up anymore either - no more assuming development will follow. It's all equity up front until you've got something guaranteed to show a bank. Interesting times we live in - post-great-recession...requires some real creativity.
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I have to completely disagree about how long credit will remain tight as it pertains to real estate investment. Let's not forget that the execs in the financial industry are pretty dang good at finding, and lobbying for, loop-holes in financial regulations that allow them to wildly throw money into the most speculative, aggressive schemes they can come up with, so they can bring in as much bonus-money as possible during their brief, 2 to 3-year lifespan as an officer - regardless of what financial devastation may eventually come of this risk-taking, and regardless of what lessons the industry has supposedly learned from history. (This is not to say the next great, reckless scheme will necessarily apply to speculative office towers; I'm just pointing out that you're giving the financial industry far too much credit here.) The financial industry has a very short memory. A decade or two from now, the so-called Great Recession will be totally forgotten while the bubble/burst cycle continues on as it always has. The current tight-credit situation is almost certainly temporary - perhaps
very temporary.
I think you're spot-on about the current market and I'm actually kind of impressed with your grasp of it. But neither you nor anyone else could possibly know a damn thing about what the market for speculative office towers will look like 10 years from now - let alone 20 years from now. Yours are just wild guesses IMO.